Cheap Fix

The inexorable rise of Shochu in Japan, mirrored by sharp declines in imported spirits, has enticed the big brewers, Kirin and Asahi, into the market. Matt Guarente reports

SHOCHU, as it’s called in Japan, or soju, as it’s known in Korea, is a curiously difficult beast to pin down. It can be made from grain, sweet potato, or molasses. It can be served hot or cold, neutral-tasting or highly flavoured. It can be of varying strength, from mild to paint-stripping and it goes under a plethora of names that denote each of these variances. Rumour and legend cloud its origins, cultural indifference and snobbishness obscure its evolution.

But despite what Japanese or Korean marketeers try and do with themimage of shochu (or soju) the fact remains that it is a drink with its roots in the working classes. There is none of the associated ritual of sake, it lacks the social cachet of imported wine or whisky, and its popularity, in recent times, has been closely linked to price.

Its origins in the western part of Japan meant a strongly regionalised market. Even now, new variants or pre-mixed versions are carefully taste-trialled because some regions prefer sweeter, more flavoured shochus, others a clean, neutral taste for drinking with food.

For Japan, two things happened to shochu in the 1970s and ‘80s that propelled it into new markets. First, Japanese students latched onto an ultra-cheap way to escape the rigours of their academic lives – shochu, with its ultra-low tax status. Suddenly the brewing companies, already faced with declining sales, became alarmed and lobbied successfully for higher tax on the liquor. Overnight, shochu hit a sales slump.

Then a second factor became a more enduring driver of sales: in the US, the so-called "white revolution" hit, and suddenly the vogue was vodka-based mixed drinks. The trend started to spread, to the detriment of brown spirit sales, and reached its logical conclusion in both eastern and western markets: the RTD (ready to drink). But in Japan, it was based on shochu.

Through the last decade, Japanese shochu sales have grown yearon- year as most other spirits have fallen. Two decades of economic turmoil, with repeated financial shocks to the world’s second-largest economy and their knock-on effects on the yen, have raised the cost of imported spirits, to the benefit of traditional shochu.

More prosaically, it drowns a lot of sorrows cheaply and, removing the rose-tinted glasses completely, it is clear that the pre-mixed sector has been instrumental in the overall rise of shochu consumption.  But shochu and soju are both success stories unheralded in the West.

Jinro, the brand leader in Korea with a 53% market share, sold more than 55 million cases of soju in 2001.  In global terms, it outsold every other liquor brand, including Stolichnaya, Smirnoff Red Label and every brand of whisky.

Official statistics from the (South) Korea Alcohol & Liquor Industry Association (Kalia), show sales of soju will reach more than 2 trillion won this year – or just over £1 billion – from total alcohol sales of about 7 trillion won, and more than half this figure will be attributable to Jinro. The overall market is slowing in Korea, though, as wealth spreads and imported spirits, mostly Scotch, grow in popularity.

The Korean market is highly concentrated; after Jinro, the next-biggest producer is Kumbokju, which produces the Charm brand with a 10% market share, followed by Doosan Corp., also with a 10% share.  Doosan has been bolstered by its success in selling a soju flavoured with green tea, prompting other distillers to produce ever more exotic alternatives to the clean, neutral standard soju. Pine mushroom and maple flavours are, currently, winning brand strategies.

However, like most spirits markets, there’s a whiff of corporate shenanigans surrounding the soju industry.  Last year, the Financial Times ran a report that Jinro was becoming edgy about the aggressive buying-up of its bonds by Goldman Sachs. It was, they feared, a ploy to take the company over.

Not so, said the American bank, we have no intention of running a spirits company. But Jinro has good reason to be skittish. Following misjudged diversifications it was bankrupt in 1997, but was saved by soju stalwarts who couldn’t bear to be without their favourite tipple and who organised "Save Jinro" campaigns.  It worked. Jinro still has a mountain of debt, but is trading profitably.

But like every drinks company, Jinro faces a battle on many sides. As Koreans grow wealthier, they are turning to premium spirits and wine, and Jinro is introducing new flavours to try to win them back. Like Britain and the US, soju and shochu makers are targeting younger adults and women with their, more accessible drinks.

Meanwhile, there is a glimmer of hope that would have been inconceivable about 20 years ago, in the shape of Japanese consumers down on their luck and looking for a cheap buzz.

Domestic shochu and imported soju are going down a storm in Japan, and the big drinks companies have been quick to capitalise, especially brewers.  The decline in beer sales, and the steady rise in popularity of shochu in general and in its pre-mixed, canned form (called chuhai) in particular, has seen all the major beer makers hop on the bandwagon.

In fact, two major trends of the last 10 years in Japan’s drinks industry have been the growth of low-malt happoshu beer and of pre-mixed chuhai canned drinks. Takara, the market leader in shochu with a 12% share, sold 15 million cases of chuhai in 2002.

It’s action the brewers can’t miss out on. Kirin Brewery, deposed from the top brewer slot in 2001 by Asahi, acted first to push its product line-up wider and deeper. In that year it snapped up a 15% stake in San Miguel, and bought Four Roses bourbon in the fall-out from Diageo/Pernod Ricard’s buyout of Seagram’s brands.

But most tellingly it also sought to change the image of shochu with the September 2002 announcement of two new brands – Kirin Mugi Shochu Pure Blue and Kirin Hyoketsu 21° Straight.  Its aim was to entice a new kind of shochu drinker by launching premium products backed with the Kirin name and using a modern approach to design, branding and indeed the product.

Asahi Breweries, the number one brewer in sales volumes, bought the liquor business of Kyowa Hakko Kogyo for around 20 billion yen (at the time, £100 million) to provide a ready-made platform with which to enter the ready-mixed chuhai and straight liquor business.

Asahi president Koichi Ikeda said at the time of the deal that Kyowa Hakko had the technology they had been looking for; a suitably polite, Japanese way of sidestepping the cold hard facts of the deal.  For £100 million, Asahi now owns a 16% slice of a market with annual (and growing) sales of £900 million.

Analysts commented that the deal had cost Asahi next to nothing. Kyowa Hakko president Tadashi Hirata said at the time of the deal, "We saw conditions getting more and more difficult for the alcohol business. Now, we can focus on our core businesses like biochemicals and pharmaceuticals."

But there’s only so much consolation-in-a-bottle you can sell to hedge fund managers who are down on their luck. As a result, industry leaders are looking to up the quality ante in an effort to win market share and improve margins.

Kyushu is the heartland of shochu; what Islay is to Scotch.  It makes distinctive, hearty flavours of shochu, and the style is spreading. Satsuma, one of the bigger producers, has launched a variety using deep sea water and potato as the fermenting base, and rival Sanwa Shuri has put a shochu using high-grain barley from Oita province on the shelves.

But the history of shochu, from peasant tipple to student lubricant to solace of the salaryman, has always been about price.  If Japan’s fortunes return to the boom times, will there be a place for shochu – or will expensive European imports again be the toast of Tokyo?